TD adds to tech capabilities with $100-million deal for AI firm Layer 6

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Toronto-Dominion Bank has agreed to buy a one-year-old artificial-intelligence startup with just 17 employees for more than $100-million (U.S.), snapping up Canadian machine-learning talent that has been in hot demand from the world's technology giants.

The target company, Toronto-based Layer 6 Inc., hadn't yet advanced beyond turning proof-of-concept work it had done for several clients – including TD – into regular, revenue-generating business. However, other early stage AI firms have also sold out for handsome sums to global companies, including Canada's Maluuba, purchased last year by Microsoft – which paid largely for its AI know-how rather than its actual business.

For TD, the deal is a chance to add depth to its technological capabilities at a time when major banks face new threats from upstart financial-technology firms and the unknown impact that the adoption of cryptocurrencies such as bitcoin may have. Banks are looking to artificial intelligence to help slash costs across their businesses, both by automating time-consuming and repetitive tasks and by analyzing large data sets to detect patterns and understand customer behaviour. Those patterns, in turn, can help detect fraud and more efficiently predict which customers banks should target for such products as mortgages.

Other Canadian financial institutions, notably Royal Bank of Canada, Bank of Nova Scotia and Power Financial Corp., have committed substantial sums to invest in AI know-how and fintech startups.

Michael Rhodes, group head of innovation, technology and shared services with TD, said buying Layer 6 is "really an opportunity to bring us a capability that helps us extract from all that data that we have a really deep understanding of our customers, and that's just core to what banking is. … Clearly, as an organization we understood the need to really enhance our playbook or capabilities when it came to data."

TD CEO Bharat Masrani said at an industry conference in Toronto on Tuesday: "We've talked a lot in the past about disruption and what would happen to banks and 'Are your business models broken?' and I say 'This [acquisition] is a great example of how TD's adapting to this new reality and new expectation, and how we are remaining on the leading edge with our customers.'"

Both TD and Layer 6 declined to disclose the amount it paid but several sources familiar with the parties said the bank paid total consideration of more than $100-million, including retention payments to employees.

The deal is also significant as it marks one of the few sizable deals by a large Canadian-based corporation in the teeming AI sector in its own backyard. Many of Canada's world-renowned academics in such areas as deep learning have been snapped up by Facebook Inc., Uber Technologies and Alphabet Inc. in recent years, causing much hand-wringing among governments that have committed hundreds of millions of dollars to fund new AI institutes in Montreal, Toronto and Edmonton. Many foreign companies have opened AI labs here, and China has backed efforts to make itself an AI leader in the coming years, creating further opportunities for top researchers to work for deep-pocketed employers.

Meanwhile, several domestic AI startups, including Montreal's Element AI, Toronto-based Integrate.ai Inc. and Ottawa's MindBridge Analytics Inc., have pledged to build independent Canadian-based giants to ensure the country doesn't lose the economic advantages of having its AI stars poached by foreign firms.

"There's any number of people that would want that team of AI and [machine-learning] specialists [at Layer 6] to help them rethink their business going forward," early Layer 6 investor Joe Canavan said. "I love that instead of [selling to a foreign buyer, Layer 6] is staying at home. It becomes something that will have significant implications nationally and internationally for TD."

Layer 6 started in the fall of 2016 as an offshoot of music playlist app-maker Milq Inc., co-founded in 2012 by Toronto entertainment lawyer Jordan Jacobs and serial entrepreneur and technologist Tomi Poutanen. The two started Layer 6 along with Milq employee and machine-learning specialist Maksims Volkovs, who earned his PhD at the famed University of Toronto lab of deep-learning pioneer Geoff Hinton.

Layer 6 quickly gained attention for beating out other top AI labs last year in a global competition called the RecSys Challenge, and its principals were instrumental in pushing for the founding of Toronto's artificial intelligence-focused Vector Institute. But when the startup began pursuing a venture capital financing round of between $15-million and $20-million last fall and talked to TD as a prospective investor, "It turned into, 'Why don't we buy you?'" Mr. Jacobs said.

The parties completed the deal in less than three weeks over the holiday.

"We felt this gave the ability to a Canadian company to leap ahead and be a world leader in AI," Mr. Jacobs said. "We wanted to build something significant in Canada."

With a report from James Bradshaw